I am Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. I write a column at Forbes.com that normally appears Sundays. Follow me on Twitter @RichardJGrant1

Taxpayers Lose Interest

November 2012 was an expensive month for Americans in more ways than one. In simple fiscal terms, the U.S. government spent $333.8 billion last month. Half of that was borrowed (government receipts were only $161.7 billion), but November was not an average month. Nevertheless, it was consistent with the bias toward rising government outlays.

The 2012 fiscal year, which ended in September, ran up a deficit of just over $1 trillion. That was not quite a third of the $3.5 trillion that the federal government spent last year. The 2011 fiscal year had a proportionately higher deficit and, at just over $3.6 trillion, the highest level of spending in history. When adjusted for inflation, it roughly ties 2009 for the highest level of real spending.

The extraordinary 18-percent leap in government spending during 2009 was due in part to the addition of new “stimulus” funding as well as spending increases (some of which were automatic) in response to the recession. The $830 billion stimulus package (known formally, if not descriptively, as the American Recovery and Reinvestment Act of 2009) added the equivalent of an extra 3 months’ worth of 2008-level spending spread over the next few years.

The past four years stand out as those with the highest inflation-adjusted spending levels by far. That is in dollar terms, but even as a percentage of GDP, US government spending has been at its highest levels since World War II.

Revenues to the federal government have been down since reaching their highest inflation-adjusted levels in 2007. They dropped precipitously with the onset of the recession but are slowly rising again.

The limiting factor for revenues is the weakness in real economic growth. Attempts to squeeze more blood out of the same stone by raising tax rates are likely to hinder economic growth and thereby restrain the growth of the tax base.

The excessive government spending doesn’t help economic growth either. Most of the federal budget now consists of programmed redistributions of income. These transfers tend to shift disposable income from those with a higher propensity to save to those with a higher tendency to consume. To the extent that this reduces saving, it also reduces investment, and with it, future productivity.

Gross interest paid on Treasury debt securities accounted for just over $25 billion of government outlays in November 2012. During the past year, interest payments accounted for almost 12 percent of the federal budget. If current trends continue, with the national debt increasing by over $1 trillion per year, interest payments by the Treasury will rival the defense budget within 15 years.

This is already a big deal for taxpayers, but not so for most recipients of interest who are adversely affected by the Federal Reserve’s low-interest-rate policies. The Fed continues to buy huge amounts of Treasury securities with the express purpose of holding down interest rates and inflating various asset prices. At the same time, the Fed is stifling and distorting the availability of bank credit. Whatever the Federal Reserve governors’ true beliefs on the proper conduct of monetary policy, they can always claim to have been compensating for the government’s overall mismanagement.

Given the current administration’s philosophy of governance – more government spending, higher taxes, heavy-handed regulation, a weaker dollar, and less personal responsibility – it should be no surprise that we have experienced four years of relative stagnation. Those are the very same kinds of policies that caused the systematically mistaken investment and increasingly risky behavior that built up over the years and precipitated the recent financial crisis. Such policies do not give different results depending on which party implements them.

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